[MUSIC] Hi there. In this set of two videos, we're going to have a look at how your age and your wealth may impact your strategic asset allocation. And the second outcome of these two videos will be to have a look at how Robo-advisor, and here we're moving into a very recent evolution in financial markets called Fintech, technology applied to finance. And here we'll be talking about Robo-advisors. And we'll be looking at how they integrate age and wealth into the strategic asset allocation. Now let's start with age. This is actually one of the first questions that financial advisors ask to their clients. Well, you know it's not very polite if the client is a woman, to go and the first question would be, how old are you? This is not very polite. So the way the advisor will ask a woman as a client how old she is is, what is your investment horizon? So there is an analogy between both, obviously. So, financial advisors typically work on the assumption that stocks may not offer an interesting profile over the short term from a risk-adjusted return perspective, but over the long haul, over the long term they do so. So they will tend to give a high allocation to equities for a young investor. So there is this empirical rule which is often used as a rule of thumb, shall we say, that the allocation to the risky assets in your portfolio, in percentage term, should be equal to 100 minus your age. So if you are 20 years old, you should have 80% in equities, and if you're 80 only 20% devoted to risky assets. Okay so what does academia have to say on this possible influence of age and wealth? Well let's have a look at some top notch finance professor, like Eugene Fama, whom we saw when we talked about value investing already. He won the Nobel Prize in finance in 2013. Actually it's not a Nobel Prize in finance, it's in economics. Finance is not recognized as a science, yet. So, what is the rule is that sometimes the Nobel Prize in economics is given to some finance professors. So he won, Eugene Fama, and this other famous finance professor, Robert Shiller, Bob Shiller, also won the same prize in the same year. And I put here, this is a bit like chalk and cheese. In French, we have a nice expression calling, we would say [FOREIGN]. It's the wedding of the carp [LAUGH] and the rabbit, meaning that these are two opposing persons. I mean, they lie way at two extremes. For Eugene Fama is the father of market efficiency, of rationality. And Robert Shiller is the father of so called behavioral finance, i e finance which integrates emotion and psychological factors when we have to take decisions. And we addressed some of these issues with Michael Lee Kersten Protoff when we talked about neuro finance. So, maybe because of these two extremes, [LAUGH] the decision was also taken in Stockholm to award the Nobel Prize to a third person, Professor Lars Peter Hansen. Who would be, in my view, closer to the person on the right, to Robert Shiller, for he is a professor in macrofinance, so he has the same kind of approach as I do. He looks at macroeconomic factors and sees how they may impact financial decisions. Okay, all this to say that basically, we have these two schools here, two extreme schools. The one from Eugene Fama would be that we're all so called homo oeconomicus, i e, perfectly rational. We only take rational decisions, we have perfect foresights and we don't do stupid things, basically. We don't let emotions interact when we have to make rational decisions. So in this possibly ideal environment, strategic asset allocation should not depend on our age as an investor nor on our wealth, but only on the underlying risk of each asset which enters the asset allocation decisions. The other extreme is the one of Robert Shiller, behavioral finance. And basically here we're talking about humans or homo sapiens, as we call them now. And for the advocates of behavioral finance and behavioral economics, by the way, our reactions as investors to risk are dependent on things like our wealth, our degree of education, our social-professional background, our investment horizon or, if you prefer, more importantly, our age. So, between these two extremes, what does the empirical evidence, the academic evidence, have to say? So the first evidence we're going to have a look at is on the impact of age. And here I mention Mister Steven Zeldes, who in 2004 did this study. And so that there was no significant evidence of a gradual phasing out of the allocation to equities as we get older, when we are employed. But there was some evidence when we retire from work that suddenly we may shift completely out of risky assets and focus on annuities and income from bonds as income from our wealth. And then on the impact of wealth, there's this other study I mention here from Guiso and Paiella in 2008. And they use a sample of more then 3,000 investors, and they look at their backgrounds, and they look at their wealth in particular. And what Guiso and Paiella show is that there is a inverse relation between risk aversion and wealth. The wealthier you are, the more risk loving you are, if you want, or the less risk averse you are. So there is actually, both from the age and the wealth perspective, some evidence that both do actually play a role in the strategic asset allocation. So this flies against the evidence that we're all perfectly rational human beings and we have to take into account things like our age or our wealth when we take strategic asset allocation decisions. [MUSIC]
